Variation in Effective Tax Rates

Note: After publication, we discovered errors related to rollovers from 401(k)s and similar retirement accounts in the tables we used in this report. Please do not cite this report as a source. More information.

Abstract

The expansion of refundable tax credits and the proliferation of specialized tax breaks means that households with similar incomes can face wildly different effective federal tax rates. For example, among middle-income households, the median effective income tax rate is 3 percent, but 10 percent of those households face effective rates exceeding 9 percent and another 10 percent receive a net government subsidy greater than 4 percent of their cash income .

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All income classes experience this wide variation, even those at the very top. Preferential rates for capital gains and dividends, a myriad of deductions and exemptions, and the progressive tax rate structure itself cause the vast majority of high-income households to pay an effective rate well below the 35 percent top statutory rate. A quarter of households in the top 1 percent of the income distribution pay less than 11 percent in individual income tax and three-quarters pay less than 25 percent.